THE manager and trustee of Sabana Industrial Real Estate Investment Trust (Sabana Reit) have hit back at claims that its upcoming sustainability-linked bond issuance could put the Reit in “financial jeopardy” or “complicate and impede” its internalisation process.
They were responding to allegations made by activist investor Quarz Capital in a letter dated Jun 14. Quarz called the S$100 million bond issuance “highly abnormal and extraordinary” since the trust currently has “zero refinancing needs”.
This is especially since the S$100 million term loan maturing in October 2024 was refinanced with a new S$100 million four-year unsecured facility in May 2024, it said.
Quarz also voiced concerns that the bond terms could “potentially result in substantial disruptions to Sabana Reit if the sponsor (ceases to hold) at least 50.1 per cent of the Reit manager”, as these terms contain change of control clauses.
This could potentially entrench the current Reit manager and its sponsor from being removed, and also create further obstacles and “substantially complicate and impede” the internalisation process, Quarz alleged.
If the issuance results in significant complications, the Reit could be placed in “financial jeopardy” Quarz said.
BT in your inbox
Start and end each day with the latest news stories and analyses delivered straight to your inbox.
In its response to the letter on Monday (Jun 17), Sabana Reit’s manager said that it has been working on the bond issuance since June 2022, before Quarz even requested to convene an extraordinary general meeting to discuss its internalisation.
The manager said it undertook the bond issuance in accordance with its fiduciary duty to act in the interests of the unitholders. The issuance will help to “stabilise the cost of funding, diversify the sources of funding, and mitigate the refinancing risks” for the Reit, it added.
“Contrary to Quarz’s allegation… such refinancing exercise is essential to the capital management planning for (the Reit),” the manager added.
It noted that it is not in the interest of Sabana Reit for such a refinancing exercise to be put on hold on account of the ongoing internalisation exercise, especially in view of the attendant uncertainties and in the current high interest rate environment.
Citing circumstances that occurred in Q1 2024, the manager said the Reit faced “operational challenges in obtaining hedging arrangements”. This resulted in its proportion of fixed rate borrowing dropping to 51.8 per cent, it said.
Completing the bond issuance will improve this figure to more than 80 per cent and significantly reduce interest rate risks while improving stability to the cost of funding, the manager said.
“As the primary use of proceeds from the bond issuance is to refinance the debt tranche expiring in 2025, this is expected to have neutral impact on the Reit’s gearing ratio upon the completion,” it added.
Furthermore, the manager explained that it is “common and prudent practice” to plan ahead for refinancings and these are commonly undertaken at least a year before the expiry of current financings. “This is to provide flexibility for the borrower and cater for ample time to negotiate terms,” it said.
It was also highlighted that under the bonds’ conditions, the manager’s resignation or removal without a replacement or substitute manager would be considered an event of default. If the manager is replaced, the bonds will continue to their scheduled maturity.
Trustee weighs in
In a separate bourse filing before the market opened on Tuesday, Sabana Reit’s trustee said the terms of the bond issuance do not place more restrictions on the internalisation than already existing under the terms of the Reit’s current financing arrangements.
It therefore disagrees with Quarz’s views that the bond issuance might impede the Reit’s internalisation. “It is unclear how Quarz has arrived at its conclusion, taking into account the reasons set out in the manager’s Jun 17 announcement and the matters stated above,” the trustee said.
Quarz had highlighted an “event of default” clause under a reimbursement and indemnity agreement (RIA) and a standby letter of credit (SBLC) facility agreement.
The RIA was entered into bilaterally between the trustee and the Credit Guarantee & Investment Facility (CGIF), a trust fund of the Asian Development Bank.
The trustee said in its statement that the RIA is separate to the terms and conditions of the bonds. It also highlighted that the RIA requires the issuer and CGIF to enter into discussions in the event of a change of control.
If CGIF does not consent to the change, it may impose additional conditions on the issuer as part of its agreement to provide the guarantee and/or be indemnified, subject to the RIA’s terms.
“Such additional provisions however have no bearing on the scheduled maturity of the bonds, with the CGIF guarantee for the benefit of the bond investors remaining intact,” the trustee said.
As for the SBLC facility agreement, a change of control would be considered a mandatory prepayment event, which Quarz claimed could result in the Reit facing financial difficulties as it would have to source for funding or provide collateral and guarantee.
An SBLC which is issued by a bank on behalf of its client, guarantees the bank’s commitment to pay a seller should its client default on the agreement. Sabana Reit’s SBLC amounts to S$10 million in favour of the trustee as the bond issuer.
“It bears noting at the outset that this amount is not material as compared to the total existing borrowings (as at Mar 31, 2024: S$333 million) of Sabana Reit,” the trustee noted. It added that there are already similar change of control restrictions in existing facility agreements.
The terms of the SBLC also do not change or add to these considerations as the lenders under this facility are already existing lenders of the Reit.
Furthermore, the trustee said it negotiated and obtained an additional requirement for prior consent in writing to be sought from lenders for any future changes of manager which triggers this review event.
“This is a more favourable position for Sabana Reit as compared to the financing terms under its existing facilities, including those that were entered into before the Internalisation process commenced,” the trustee added.
Units of Sabana Reit were trading flat at S$0.35 as at 11.26 am on Tuesday.
